By Dan Burns and Howard Schneider
(Reuters) – The world’s major central banks have been pushing unanimously on the idea that higher interest rates will be necessary to combat a streak of high inflation and have now tightly restrained their monetary policies in the hope that the world’s intertwined supply chains will continue. On the verge of repair.
The Bank of England on Thursday joined the Federal Reserve and the European Central Bank in anchoring a pessimistic policy shift to expected relief from supply bottlenecks over the next few months – and easing the inflationary pressure that officials feel these bottlenecks have caused.
The Bank of England on Wednesday kept the policy rate steady https://www.reuters.com/world/uk/bank-england-wrong-foots-markets-keeps-rates-hold-2021-11-04 despite broad expectations That he would have become the first major central bank to raise interest rates in reference to the high pace of rate increases that has taken root this year.
The Bank of England said inflation is “expected to diminish over time, as supply disruptions recede, global demand returns, and energy prices stop rising”, and is likely to peak in April next year, the BoE said in an announcement vowing to train its eye. on ‘medium-term expectations for inflation’ and ignoring ‘potentially transient factors’.
This reiterated the Federal Reserve’s use of the word “transitional” https://www.reuters.com/business/with-bond-buying-taper-bag-fed-turns-wary-eye-inflation-2021-11-03 to describe the current inflation cycle. The European Central Bank predicted that price increases would be “muffled” in the medium term. In a statement this week, European Central Bank President Christine Lagarde was outspoken in saying, amid market bets to the contrary, that the ECB is unlikely to raise interest rates in 2022.
It is a recommitment, in a sense, to one of the primary objectives of monetary policy from the start of the pandemic: keeping borrowing costs low long enough to see households and national economies through the health crisis, a target that remains unmet given ongoing contagion, lost jobs, and uncertainty over when. Full return of workers.
But it is now also creating a shared outlook — and a common set of risks — for the central banks that control three of the world’s largest reserve currencies, which many feel are on the verge of switching to anti-inflation mode.
Instead, they are counting on solving problems outside their control, from the backlog of ports to the advance of the virus in manufacturing centers or the willingness of US residents to fill near-record job openings.
“Our tools cannot relax supply constraints,” Powell said at a news conference on Wednesday after the release of the Federal Reserve’s latest policy statement. But, in a outlook now shared among the major developed countries, “we continue to believe that our dynamic economy will adjust to supply and demand imbalances and that, as it does, inflation will decline to levels much closer to our long-term target of 2%.”
The question is whether the improvements in supply are happening fast enough that Powell and his colleagues do not feel the need to intervene by curbing demand at higher interest rates, a move they all agree for now is premature but hinges on easing inflation over the next few months. .
Some smaller central banks have already moved to exit anti-epidemic policies.
The Bank of Canada surprised markets a week ago with hawkish signals about its outlook, then this week the Reserve Bank of Australia suggested that rate increases are on the way, although the RBA took a more cautious approach about timing.
This has fueled expectations that major monetary policy players will speed up their timetables for raising interest rates. Interest rate futures and bond markets on both sides of the Atlantic were repriced for earlier rate hikes by the Federal Reserve and the European Central Bank over the past month in the face of an inflation environment that was threatening to be more steady than fleeting.
Prices have already eased around the Fed’s increases. Two-year Treasury yields fell by nearly 5 basis points on Thursday, the biggest drop in nine months and a big drop for the Federal Reserve’s policy outlook – falling even as the US central bank announced it would cut its $120 billion monthly bond-buying program by $15. billion per month.
“If anything is wrong it is how the markets read the reaction function of these banks,” said Ed El-Husseini, senior pricing analyst at Columbia Threadneedle Investments. Everyone agrees on the potential turnaround for inflation next year, and in the case of the Fed committed to a return to “maximum employment,” a target it hasn’t fully set but Powell reiterated on Wednesday that has not been met.
“They have never had maximum employment criteria for ‘take off’. The analyst said it’s a wild experience and it’s just beginning. Why short the circuit now?”
(Additional reporting by Howard Schneider in Washington, Palaz Kourani in Frankfurt, William Schomberg in London; Editing by Shree Navaratnam and Paul Simaw)